Results of the BRE Bank Group: Summary of 2007

Results of the BRE Bank Group: Summary of 2007

The best financial results this decadeHigh return on equityDynamically growing profitability in all strategic areasRecommendation to retain the 2007 profit for further growth of the BankPlans and priorities 2008 In 2007, the BRE Bank Group generated the best financial results this decade. The consolidated profit before tax was up by 65.6% YoY and stood at PLN 954.5 million (PLN 710 million net) compared to PLN 576.4 million in 2006. The return on equity (ROE) reported in 2007 was 35.9% pre-tax (compared to 26.9% in 2006), attesting to the high profitability of equity invested by the shareholders.

“This was a very good year, bringing the best result on the core business in the history of our bank. The BRE Bank Group kept up a very high rate of business growth in all strategic areas while our excellent return on equity ranks us among the sector leaders. In 2007, we acquired 414.5 thousand new clients (up by 20.2%), PLN 7.8 billion new deposits (up by 31.4% YoY), and sold PLN 10.7 billion of loans (up by 44%). We are ready to face new financial challenges and to continue improving the quality of service, advisory, and modern products offered to clients. The combination of these factors is a necessary condition of further market success,” said Mr Sławomir Lachowski, BRE Bank CEO.

The financial results of 2007 were mainly driven by:the net interest income at PLN 1.03 billion, up by 40% year on year;net commission income at PLN 591.4 million, up by 35% year on year;trading income at PLN 486.5 million, up by 21.7% year on year;sale of SAMH at PLN 89.5 million of consolidated profit before tax;continued expansion of the retail and corporate branch network. Dynamically Growing Profitability in All Strategic Areas

“The generated results were possible thanks to advantageous market conditions and the effective performance of all business lines and strategic subsidiaries of the Group which significantly outperformed their sales and financial targets. The largest contribution to the results of the Group came from the Corporations and Financial Markets Line which generated a profit before tax of PLN 576.7 million in 2007, up by 28.8% year on year. The Retail Banking and Private Banking Line reported a very high surplus over the targets: its profit before tax was PLN 227.2 million, up by 98.2%. The consolidated subsidiaries of the BRE Bank Group also grew their profit before tax significantly, by 42.1% YoY, and generated PLN 268.1 million. The contribution of the strategic subsidiaries to the results of the Group was at 28%,” added Mr Lachowski.

Corporations and Financial Markets

In 2007, the Corporations and Financial Markets Line generated a profit before tax of PLN 576.7 million, contributing 60.4% of the Group’s profit on regular business. The assets of the Line were PLN 43.6 billion, up by 23%, and its liabilities were PLN 41.5 billion, up by 24.4%. Over 29% of the Line’s profit was contributed by the Group subsidiaries, mainly DI BRE, BRE Leasing, BRE Bank Hipoteczny, and Intermarket Bank.

The Line’s segment of Corporate Customers and Institutions generated a profit before tax of PLN 444.8 million in 2007, up by 36.6% (by PLN 191 million) YoY. In 2007, the segment acquired 2,495 new customers, of which 73% were SME customers (companies with annual sales of PLN 3 – 30 million). At the end of 2007, BRE Bank served 12,285 companies, including 7,631 SMEs.Corporate lending grew very dynamically in 2007. Loans granted to BRE Bank’s corporate customers were PLN 12.7 billion in 2007, up by PLN 3.5 billion year on year. BRE Bank’s market share in corporate loans was 6.5% at the end of 2007, compared to 5.9% at the end of 2006.

BRE Bank corporate customers’ deposits were PLN 19.7 billion at the end of 2007, up by PLN 3.5 billion year on year. BRE Bank’s market share in corporate deposits grew from 8.6% at the end of 2006 to 9.3% at the end of 2007.

Sales of products involving EU financing (commitments, credits, guarantees) were up by 68.3% year on year in 2007. BRE Bank was the second largest provider of loans for investments with EU financing by number and by value. BRE Bank’s market share was 15%.

The segment of Trading and Investments generated a profit before tax of PLN 131.9 million in 2007, up by 7.9% year on year. However, it must be remembered that the 2006 results included large one-off gains (dividends from PZU and Vectra, sale of Novitus shares). The 2007 profit was mainly driven by fx transactions and issues of trading debt securities, as well as risk and liquidity management operations.BRE Bank ranked first on the market of mid-term bank debt securities and second on the market of commercial papers with a share of 27.55% and 17.86% respectively. BRE Bank again took the first position in the Finance Ministry ranking of Treasury securities dealers (2007 ranking).

Retail Banking and Private Banking

The Retail Banking and Private Banking Line, which was growing the fastest, reported a profit before tax of PLN 227.5 million in 2007, up by 98.2% (or PLN 112.4 million) year on year. The profit was mainly driven by the net interest income (up by 48%), the net commission income (up by 85%) and the fx income (up by 43%).

The loans portfolio was growing dynamically in 2007, especially mortgage loans (up by 58% or PLN 4 billion YoY to PLN 11.1 billion). The balance-sheet retail loans portfolio was PLN 13.14 billion in 2007, up by PLN 4.9 billion (or 59.6%).

Retail customers’ funds grew to PLN 12.79 billion in 2007, including PLN 10.36 billion of deposits and over PLN 2.43 billion of assets in investment funds.mBank started its operation in the Czech Republic and Slovakia in November 2007. Today it serves close to 50 thousand customers and has over PLN 205 million of deposits.

“The year 2007 was a turning point for Retail Banking. The profit before tax of mBank, MultiBank and Private Banking was PLN 227.5 million, contributing 24% to the profit of the Group. Retail Banking had over 2 million customers, retail loans were PLN 13.1 billion, up by 59.6%. Retail customers’ deposits were PLN 10.4 billion, up by 46.8%. I must stress that the growth rate in all these areas was well above the market. Loans grew twice as fast and deposits more than 4 times as fast as the market. mBank made the greatest contribution to the results of the Line: it generated a profit before tax of PLN 138.3 million in 2007. MultiBank, which crossed the break-even only 2 years ago, today contributes 36% of the Line’s profit and generates a profit before tax of PLN 81 million.  I can say with satisfaction that BRE Bank Retail Banking generates high profits and uses them to finance dynamic growth,” stressed BRE Bank CEO.

Private Banking reported strong results: its profit before tax was PLN 20.4 million in 2007. Private Banking and Wealth Management served 7.71 thousand customers at the end of 2007. Assets under management including deposits, asset management and financial market products were PLN 4.81 billion at the end of 2007, up by PLN 348.1 million YoY.
(For more information see Appendix 1: Retail Banking)

BRE Bank Group Subsidiaries

The consolidated subsidiaries of the BRE Bank Group generated a profit before tax of PLN 268.1 million in 2007, up by 42.1% year on year, although SAMH was no longer in the Group. As a result, the contribution of the strategic subsidiaries to the profit of the Group was 28%. The largest contribution came from the subsidiaries of the Corporate Customers and Institutions Line.
(For more information see Appendix 2: Group Subsidiaries)

Key Indicators
The BRE Bank Group’s return on equity (ROE) was 35.9% pre-tax in 2007, one of the highest in the sector. Despite the business expansion, the strict cost discipline was maintained: the cost/income ratio fell from 63.7% in 2006 to 55.5% in 2007. The Group’s capital adequacy ratio was at a safe 10.2% (10.67% at the Bank).

BRE Bank Stock Performance

BRE Bank’s stock valuation was well above the market in 2007. BRE Bank’s stock price gained 50.3% in 2007 and was PLN 505 at the last trading session in 2007. Meanwhile, the WIG index gained 10.4%, WIG20 5.2% and WIG-Banks 13.4%. BRE Bank’s stock offered the highest return among WSE listed banks. On 17 October 2007, BRE Bank’s stock price was record high at PLN 600. The company’s market capitalisation was PLN 15.0 billion (EUR 4.2 billion), compared to PLN 9.9 billion at the end of 2006.

Recommendation to Retain the 2007 Profit Retention for the Further Dynamic Growth of the Bank

In view of further dynamic business expansion and the related increase of the capital requirement as well as the implementation of Basel II regulations, the Bank’s Management Board recommends the shareholders to retain the entire 2007 profit in the Bank.

“According to our targets for the next 3 years, we want BRE Bank’s CAR to remain safe above 10%. In the context of dynamic business expansion, we want to achieve the target without asking the shareholders for a capital injection. I believe that the proposed retention of the entire 2007 profit for our further growth is appropriate and effective also from the perspective of the investors,” said BRE Bank CEO.

Plans and Priorities 2008

“On 26 November 2007, seven years after mBank’s launch in Poland, we started operations in the Czech Republicand Slovakia. The transition of a local company into a multinational corporation is a long process. We are faced with a great challenge as we consider further expansion of mBank’s business model to Hungary, Romania, Germany, the UK and Ireland in 2008. I must emphasise that this is currently our key strategic initiative supported by Commerzbank. We have the chance and opportunity to leverage several years of mBank’s experience in Polandto build a strong position by introducing a similar business model in the neighbouring countries,” said BRE Bank CEO.

In 2008, BRE Bank plans further fast growth of the loans portfolio (by 34%), deposits (by 18.5%) and consequently assets (by 21%).
The priority strategic initiatives in 2008 are related to mBank’s expansion to new foreign markets and continued strengthening of the position in the Czech Republic and Slovakia. The 2008 plan provides for the development of savings products, including structured products, and continued expansion to the consumer finance market together with related expansion of the sales network. By the end of 2008, mBank’s network dedicated to sales of consumer and mortgage loans will grow two-fold to comprise over 200 locations (mKiosks, Financial Centres, Partner mKiosks). MultiBank’s distribution network which has a strong track record in sales will also grow. As its customer base is growing, MultiBank wants to strengthen the role of Advisors to become even more of business partners to customers. At the same time, MultiBank will retain its customised service profile and tap the growing potential of the retail market in large and mid-sized cities. By August 2008, MultiBank’s branch network will have 139 locations.

In Corporate Banking, BRE Bank wants to acquire 1.1 thousand new customers with a high income potential to serve 13.4 thousand such companies (including 8.6 thousand SMEs). The 2008 plan provides for growth in corporate loans by PLN 2 billion (including loans with EU financing up by 17%). By the end of 2008, BRE Bank plans to open another 20 Corporate Offices. Network expansion is a part of the strategy providing for dynamic growth of the corporate customer base by 2009, especially SMEs. The target is to have 23 Corporate Offices and 23 Branches.

“Despite the current difficult situation on global markets and the expected slow-down in the USA and Western Europe, we expect stable growth of Poland’s economy. The banking sector will grow less fast than in 2006-2007 but it will still grow relatively fast. The BRE Bank Group will be growing faster than the market, mainly thanks to the selective expansion strategy,” added Mr Lachowski.
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